The SeniorCare: Strong Deal Flow Continues, With More to Come

In last month’s issue we reported on 16 transactions covering 23 facilities – a record in terms of number of deals and diversity of buyers. Although the number of acquisitions is down this month, as expected, the diversity continues with several regional companies, one newly formed company and a financial buyer involved in November’s buying spree. In addition, the acquisition flow was evenly spread among the skilled nursing, assisted living and independent living markets, with even a CCRC thrown into the mix.

In the largest deal of the month, an entity called BRE/Independent Living, LLC entered into an agreement on November 28 to purchase the remaining assets of ILM II Senior Living, Inc. These facilities had been on the market for several years, with an original agreement in 2000 to sell the group to Capital Senior Living (NYSE: CSU), the company that has been managing the properties for several years. That agreement was terminated on February 8, 2001, and shortly thereafter Cohen & Steers began the process of finding a new buyer.

ILM II, formerly known as PaineWebber Independent Living Mortgage Inc. II, is a "finite-life corporation" that qualified to be taxed as a REIT. A few months after the deal with CSU was terminated, ILM II tried to extend its finite-life existence from the original date of December 31, 2001 to December 31, 2008, but the proposal was not approved at the annual meeting of shareholders this past August, and the sale plans continued with a rather short deadline.

BRE has agreed to pay $45.5 million for the five communities with 703 units, or $64,700 per unit. The properties are in five different states from Florida to California, with no apparent economies. This will not matter to the buyer, however, because it plans to retain CSU as the manager. Although management at CSU had tried to purchase the properties to avoid losing up to $1 million in annual management fees, the outcome may be even more beneficial to the company, avoiding the leverage and depreciation hit to earnings associated with an outright purchase.

The communities are mostly independent living with some assisted living units, and were built between 1984 and 1992, with an average of about 1988. During the past four quarters, average occupancy has declined at four of the five facilities, with a current portfolio average of 86% for the quarter ended August 31. Revenues for the fiscal year ended August 31, 2001 were $14.2 million, down 14.6% from the previous year. Based on the most recent performance, the price to revenue ratio is about 3.1x, low for independent living but average for the assisted living market. The buyer appears to be an investment entity created by New York City-based The Blackstone Group, but we have little information on the details.

In another retirement community sale, Atria Senior Quarters sold a large facility in Tacoma, Washington to Prudential Real Estate Investors for approximately $24.3 million, or $102,500 per unit. The community contains 141 independent, 77 assisted and 19 dementia units and averages above 95% occupancy. Although it was constructed in three stages from 1987 through 1997, the units are all in one building. Revenues this year are expected to be about $7.5 million, and after a 5% management fee, the cap rate will be just over 11.3%. There is apparently some deferred maintenance that will require an unknown amount of additional funds to be invested by the buyer. Overall, it looks like a good deal from both sides of the table. Prudential plans to hire Renaissance Senior Living, an Irvine, California-based company, to manage the community.

Although profitable and in need of little home office oversight, the sale makes sense for Atria because it was the company’s only asset in the Pacific Northwest. David Rothschild of CB Richard Ellis represented the seller in the transaction.
In the assisted living sector, we have more details on Newton Senior Living’s (NSL) deal for three assisted living facilities in Connecticut (first mentioned in last month’s issue). One facility has 86 "assisted living" units and 22 dementia units, while the other two have 91 assisted and 22 dementia units each. Although technically assisted living, about 15% to 18% of these units are occupied by residents considered to be more independent. In NSL’s other communities, independent living units comprise just over 25% of the total, and the plan is to increase these three Connecticut properties to this average. The dementia units are all studios, but each community has five two-bedroom units and more than 50 one-bedroom units, so there appears to be space to accomplish the desired mix.

The three buildings opened during 1999 and 2000, with the last one taking residents beginning in April 2000. Average occupancy for the three is just 75%, which is what prompted the owners to hire NSL to manage the group with an expectation of selling the properties to NSL in the first half of next year (the price has been determined). The properties were initially underwritten using a 6.5 to 7.5 resident net monthly absorption rate. At that rate, they would all be full, but the reality of the market ended up being closer to 3.0 to 4.0 per month. One of the facilities is in a very competitive market, where four new assisted living facilities opened within an 18-month period, slowing the fill-up rate. NSL now has 16 communities with more than 1,500 units.

Bankrupt Grand Court Lifestyles continues to unwind with the sale of a 60-unit assisted living facility in Pensacola, Florida, although technically the seller was Pensacola Village Associates. The facility was built in 1989 and had seven semi-private units. Although occupancy has been averaging close to 90% (based on units, and 84% based on beds), it ran at just breakeven after a 5% management fee. Revenues this year will be about $890,000, down from $971,000 in 2000.

Given these issues, it should not come as a surprise that the facility sold for $1.0 million, or $16,700 per unit. The buyer is a local provider who owns another facility a few miles away. He is counting on some economies of scale as well as a reduction in operating expenses to increase the level of profitability. A local bank provided the financing, and Allen McMurtry of CLW Health Care Services Group represented the seller.

Assisted Living Concepts (AMEX: ALF) closed on the acquisition of 16 of its Texas facilities that had previously been leased from an affiliate of the former Meditrust. ALF paid $23.5 million, or just under $1.5 million per facility. Given the small average size of the company’s facilities, our guess is that the price per unit is in the neighborhood of $40,000.